The Federal Reserve Failure

Today marks the beginning of the annual meeting of central bankers in Jackson Hole Wyoming. The central bankers of the world meet annually here to discuss their shared mission of ensuring that the world's financial markets continue to fuel economic growth around the world. Unfortunately, they are confronted with the same problem they have all faced since the great recession "ended", namely that they are seemingly incapable of achieving their missions. With persistently low inflation, low labor participation rates and slow economic growth from the entire first world, it is undeniable that the central banks of the world have failed to achieve their shared goal of persistent economic growth. Numerous newspapers around the world have taken the opportunity this meeting presents to opine on why this is and what should be done about it. Once article in particular struck me though; it's an opinion piece in the Wall Street Journal by a former member of the Federal Reserve board who has turned academic. Here's the Link . I encourage you to read the piece because I think it has some very prescient ideas about how the US Fed system needs to change.

What got a bee in my bonnet about the above linked article though was the repetition of the sentiment that academics and central bankers are confused as to why we have slow growth in the first world. Now, I've talked about this before Link , but the reason we have slow growth is anything but a mystery. We have strangled growth with high taxes, vast and expensive regulatory states, vast debts (both at a government level and at an individual level) and laws that encourage multinationals invest in the developing world while stymieing growth of small business back home. At this point, the continued complaint feels a lot like the famous Simpsons quote: "We've tried nothing and we're all out of ideas!" Link . The real problem here is that the Fed's mandate is to control unemployment and inflation by manipulating the federal funds rate and doing asset purchases and sales through the treasury. But, to solve the problem of persistently low growth, we need comprehensive regulatory reform to change the incentive structures that encourage businesses to move elsewhere and not reinvest their earnings at home. This means that the required reform literally is not within the Fed's powers. All the Fed can do is reactively adjust the interest rate and buy and sell assets, essentially manipulating the money supply, to try an get businesses to invest in labor and capital. There's nothing the Fed can do about the fact that international businesses are taking the cheap money, looking at the regulatory landscape, and are using that money to buy back their stocks, buy out competitors and move operations overseas to cheaper locales. The only way to fix this incentive problem is for the legislatures of the first world to undertake massive reform. Instead, what we have is infighting and regulatory sclerosis.

So where does that leave us? I predict that the results of the Jackson Hole meeting of central bankers will be a lot of hand wringing and a lot of doubling down on the same failed strategies. Until the governments of the world put on their big boy and girl pants and sit down and actually do some legislative reform, the first world is going to continue to follow in Japan's footsteps of ever increasing national debts and persistently slow or negative growth. So, to quote another internet meme, to the governments of the first world: "Your policies are bad and you should feel bad!" Link .

What's Going On in American Politics

Hello once again dear readers. As you may have noticed, I've been avoiding talking about the current election in the USA. This has left me with little to blog about recently, as the news here is still pretty much all election all the time. My not writing about the campaign is mostly because of my complete disdain for the process and my antipathy towards the candidates. The primary process is a joke, the rules are skewed to favor establishment candidates, and it has become so expensive to run that only shills for their party's well heeled interests can afford to run. Well, them or bombastic billionaires who don't care about wasting a few hundred million here or there. So I've avoided the subject like the poison it is.

During this time I have noticed that the powers that be in this election cycle constantly wonder why it is someone like an avowed socialist, or a bombastic billionaire, can be viewed by so many as viable candidates. To me it's never been that difficult to figure out, it's because both parties have betrayed their voters. What do I mean by this? That the left leaning democratic voters have seen election after election where their candidates have pledged to tame corporate interests and help the middle and working classes, and then failed completely to do so. Then, instead of owning up to their complete failure and acknowledging that most of their biggest donors are the corporate interests that they had pledged to tame, they blame the other party despite having controlled the presidency for 7+ years and majorities in the legislature on and off during this time. And don't think I'm letting the republicans off the hook either. They get elected by pledging to uphold "traditional" values, taming big government, and allowing the free market to prosper and create jobs for the middle and working classes, and have also completely failed in accomplishing any of it. They, however, at least are honest about being shills for their corporate overlords, not that this is all that much better than lying about it like their opponents do. Both parties are like children standing over the broken lamp of America and pointing at the other saying "He did it!" It's disgraceful. Meanwhile, wages have shrunk or stagnated, the labor participation rate has bounced around historic lows, and millions have fallen into virtual poverty, even if they aren't in poverty statistically. It baffles me how these fools can't see this and don't recognize that their positions of power have never, in their lifetimes, been on shakier ground. If they can't see socialist candidates and populist blowhards as canaries in the coal mines, then they deserve to be tarred and feathered. And if they continue to be so oblivious, they risk the proverbial tar and feathering becoming actual violent social unrest. This country was founded on revolution, and they would be fools to think another one isn't possible. But then, we already established their foolishness.

To go along with this sentiment, I read a poignant piece in the Wall Street Journal by Peggy Noonan. The premise of the article is having a "2016 Moment", or to realize this election will be historic, and not necessarily in a good way. She reports one of her long time friends, in stumping for a candidate in New Hampshire observed that:
"I was struck as I walked along a neighborhood using the app that described the voters in each house. So many multi-generational families of odd collections of ages in houses with missing roof shingles or shutters askew or paint peeling. Cars needing repair... It was easy to see a collective loss of hope in a once-thriving town... years of neglect and sadness. Something is brewing."
http://www.wsj.com/articles/that-moment-when-2016-hits-you-1461281849
This, I believe, hits it on the head; this is exactly what's going on in this country. Years of political neglect and kowtowing to special interests and the elite of both political persuasions has created a hollow shell of the America that was. An America which flees to the welcoming and reassuring arms of socialism, or into the bombastic fury of populism. Years of pursuing trade deals that export jobs and import profits for the elites, years of increasing taxation and decreasing return on those taxes, years of abject neglect, have destroyed the credibility of both parties. And if they don't make an about face soon, they may very well get crushed by the electorate they condescendingly pander to during elections, then ignore while in power.

If the politicians don't watch out, they may find the smell of freshly boiled tar visiting their neighborhoods. It may be time to invest in feather pillow manufacturers.

The Myth About Less-Skilled Millennials

I saw an article today that really pissed me off. It commits two sins I see constantly in modern journalism, namely it panders to its audience (in this case, baby boomers) without referencing any facts directly, and it ignores easily Googled facts that directly disprove its point. It's not that it addresses the facts and argues that they aren't important, I mean it just flat out ignores them. Instead, it references someone else's study without using any of the facts or figures the study used to make its conclusions. Moreover, it was printed in the Economics section of the Wall Street Journal. I expect a certain lack of facts or research in less respected news organizations, but the Wall Street Journal and The New York Times are supposed to be better than that. This article lets down the paper badly.

Well, enough preface, here's the link: http://blogs.wsj.com/economics/2016/02/29/how-a-less-skilled-american-workforce-may-be-holding-back-growth/ . You can see by its very title what its editorial viewpoint is, that the workforce is getting less skilled and that's what's wrong with the economy. Here's what really bothered me, it states that: "Well-educated baby boomers are retiring, and many laid-off older Americans who want to work have struggled to find jobs following the recession, bringing the overall experience level of the workforce down. College enrollment is on the decline after peaking in 2011, as the economic expansion creates job opportunities for less-skilled workers." The implication here is clear, workers not in the baby boom generation are less skilled. If it were just a question of experience, this wouldn't be an interesting statement at all. Obviously retirees are more experienced than those of working age, they're older. No matter what time in history we look at, this should be a true statement. The older are always more experienced by sheer dint of living longer and having had more experiences. This is so blisteringly obvious a statement that I refuse to believe that's the point of the article. The actual editorial perspective of the article is made clearer by the college enrollment statement. By saying baby boomers are well-educated and college enrollment is in decline, it’s using two, at least arguably, true statements to imply something that isn't true. Namely, that younger generations are poorly educated. Here's a Wikipedia graph on educational attainment over time: https://en.wikipedia.org/wiki/Educational_attainment_in_the_United_States#/media/File:Educational_Attainment_in_the_United_States_2009.png . The percentage of people 25 and older with a college degree has increased fairly steadily for the last 70 years. The article concludes by saying: "...there (i)s one obvious policy solution: more skills and more education." Well, we know that educational attainment has been increasing, so either we have a skills mismatch that the current educational system isn't meeting (so more education won’t cure the problem), or there are simply not enough jobs for skilled college educated workers. But implying that younger workers are poorly educated and unskilled is just pandering to the prejudices of older generations and not supported by basic facts.

And now we get to the crux of our economic doldrums. Even if we choose to ignore a global economic slowdown, wars across the middle east that have ravaged regional economies and trade partners, or the huge asset bubbles created by central banks desperately expanding the monetary supply in an attempt to cover for bad government policies that harm economic growth; the problem isn't that the fundamental makeup of the workforce is changing, it’s that the so called "recovery" is only creating low skilled, low paying, temporary jobs. The article even admits that in the above quote. College enrollment doesn't change where the demand for labor comes from, except possibly in higher education. In all likelihood, if we see continued declines in college education, it will be because employers have stopped valuing college degrees. Or, at least, that employers don't value them enough to pay a high enough wage to make the investment in a four year degree worth it. So let's stop bemoaning the bursting of the education bubble and let’s stop blaming a retiring baby boomer generation for a loss in workforce participation and productivity. Let's instead put blame where it is due. Namely, lets blame bad government policies that have created perverse incentives for companies to move as many jobs as humanly possible out of the first world. Policies that mean the only jobs created are low level service jobs that can't easily be outsourced overseas.

So what's the solution? First, we need to re-examine the benefits of free trade treaties with second and third world countries. If a country has a large net loss of jobs as a result of a trade deal, and can only point to cheaper goods and profits shared between corporate insiders and global investors, then the deal is a failure. A population of unemployed and underemployed workers can't afford to spend big on consumer goods, they rely much more heavily on welfare programs, and their lost taxable wages takes away the tax revenues governments need to pay welfare benefits. Cheap consumer goods mean nothing when a family is struggling to pay the bills and feed itself. Secondly, we need to rewrite the tax code so that big multinationals are paying at least as much in taxes on local revenue as the local start-ups that try to compete with them. The small business used to be the biggest employer of labor in the USA. But with a tax code that hamstrings them, small businesses have been failing and employing less people. Lastly, we need to intervene and cut the red tape that prevents small businesses from being created. This needs to be done at a local level, and solutions to these problems will necessarily be unique to each region.

And on a final note, I expect better of the Wall Street Journal. Don't just quote someone else's study to libel younger workers. Do some investigative reporting. Test the numbers in the study against other data sets to see if their conclusions make any sense. Moreover, when the world is at war, foreign economies are crumbling, and the Euro zone falling apart, blaming a dip in college enrollment and the retirement of baby boomers for our economic stagnation is just asinine. It's a symptom of much greater problems in the world, and ignoring those problems just makes it easier for lazy governments to do nothing about them. Lastly, stop blaming millennials for problems created by the policy decisions of the "greatest" generation and "baby boomers". No one should get a free pass for their poor leadership and economic stewardship.

State of the World at the End of 2015

Hello, everyone. As many of you have noticed my blogging fell off a bit this year. Part of this is that real life concerns and work that either earns me money, or might earn me money in the future, has taken precedence. But part of it is that so much of what annoys me on a day to day basis are things that I have already blogged about. If you've perused my posts, you've seen my complaints about the incompetence of government. So you'd think I'd have more to write about during a US Presidential campaign. But the reality is that the positions of most of the candidates are so banal, so pandering and so obviously lacking any sincerity, that I haven't felt much need to attack any of them. It feels too much like mocking toddlers or fighting with cripples. So I'll wait till the general election before I start pointing out why various political positions are stupid. And frankly, no matter who gets nominated, there will be a plethora of possible content on this front.

At the end of 2015, we're still sitting in the middle of the same terrible economy that we've had since the great recession. I've hit on the causes of this many times, but it's still disconcerting to hear the government crow about all the success its had getting people back to work. If you really think living in a part time, no-benefits gig economy is progress, you deserve a heap of scorn. Bragging about a low unemployment rate when the participation rate is bobbing around all time lows is willful ignorance. It's as if politicians don't realize that they are damning themselves with their own faint praise. There's a reason why Trump and Sanders are popular, its because the populace of the USA has realized the emperors have no clothes and no idea that their ugly nakedness is flapping in the breeze of their own hot air for all to see.

I find that I don't have a lot to be thankful for on the global economic and political fronts either. Terrorism has become a global issue and, if we aren't careful, a world war. Politicians seem torn between sticking their heads in the sand or wanting to nuke whole regions of the world. Like mass murder ever made people less violent and vindictive. Of course, ignoring problems usually isn't an effective solution either. Still, the lack of intelligent well thought out solutions is depressing. This reality doesn't leave me with much to write about, as I'm not one for hand wringing histrionics or stating the obvious. Suffice it to say that we're going to need targeted solutions to a multiplicity of problems and some global stability before we're going to be able to handle this issue.

I guess, when it comes down to it, the point of this post is to say so long to 2015 and good riddance. Also, with so few things in the public sphere to be thankful for, that we should all focus on ourselves, our friends, and our families, for things to be happy about. When the world looks like crap, I guess you need to go home and hug the ones you love. Find happiness in the personal. And lastly, here's a virtual ogre hug, from me to you, for reading my blog. I wasn't sure who'd read my posts when I decided to vent my spleen on the internet, but a few thousand of you have. And for that, I am grateful.

The Experts are Still Confused About Slow Global Growth

As we enter the full swing of another election cycle here in the USA, more attention than usual is being paid to recent census findings and the Federal Reserve Board's debate on when to raise interest rates. The big headlines that have come out of these news reports have been that real incomes in the USA have declined 6.5% since 2007, and that despite central banks globally pumping out nearly $8 trillion into the global economy, growth remains tepid at best. This has left global policy makers scratching their heads and wondering what else they can do to spur economic growth and the Fed waffling on rate hikes. Links to relevant articles discussing these findings: http://www.wsj.com/articles/central-banks-lesson-easy-money-alone-isnt-a-growth-salve-1442505860 , http://www.wsj.com/articles/the-white-house-and-the-census-1442532398 .

For those of you who have read my previous blog posts, the reason for both of these stats are fairly self evident. But for those who missed them, here are some (but not all) of my relevant posts on the subject: http://ogresophist.blogspot.com/2014/02/the-failure-of-stimulus-spending-in.html , http://ogresophist.blogspot.com/2014/09/high-taxes-have-consequences.html . If you want the "Cliff's Notes" version, global growth woes in the first world are caused by structural problems. These problems are created by high taxes used to fund first world entitlements and restrictive laws that place huge financial and time burdens on businesses at all stages of development, from formation to multinational conglomerate. Rather than doing anything about these mammoth issues at the heart of our current stagnation, politicians have relied on central banks to pump easy money into the global economy in the hopes of spurring growth. Shocking no one but the most unobservant and doctrinaire, instead of investing this money at home, the global investing class has used this money to chase higher yields in foreign markets. The end result has been volatility and little growth in the first world.

The moral of this story is timely for voters in the USA, or any country about to enter into an election cycle. Voters need to demand structural reforms from their leaders. They need to elect people with the power and political will to make the compromises needed to restore global growth. If we keep electing the same people who are wedded to the same failed economic policy ideas we are doomed to repeat our current low growth woes. In short, we need to demand better of our political leaders.

Greece's Problems are not Unique to Greece

Seems like you can't escape news about Greece and the crisis in the Euro zone these days. Today's news is that Greece and its creditors have reached a tentative agreement on a reforms for loans plan. In the coming days, the drama will shift from the negotiations for the accord, to the negotiations within the Greek parliament to try and get enough votes to pass the reform. It will be interesting to watch and see whether the legislature will continue to stick its head in the sand on reforms, or whether it is willing to make the concessions required to continue to finance their bankrupt nation.

In case you don't know what I'm talking about, Greece is a bankrupt nation that exists in Europe. It joined the Euro currency union and lived off the easy credit the shared currency and associated legal framework afforded them. When the great recession hit, the country went through a dramatic economic downturn that severely taxed public resources due to the Greeks' generous welfare programs. The country has never fully recovered. The long and the short of this is that Greece has been relying on loans from the IMF and its Euro zone partners in order to keep the government and its banks from closing. In order to pay the interest on these loans, Greece has been undergoing what is known as austerity, or the painful process of cutting budgets and raising taxes, that is required to increase revenues and decrease liabilities enough to keep it from going bankrupt and defaulting. This process has been so unpopular among the Greek electorate, that they elected an anti-austerity candidate who vowed to renegotiate the terms of the debt and fight with Greece's creditors. Since taking power, the banks have been all but shuttered and the government is mere days away from being forced out of the shared currency.

While it is easy for us in the USA to point and giggle at the problems of Europe, we can only do so if we choose to ignore a similar problem that exists in many states and municipalities in our own country. The problem is that, fundamentally, the public is not willing to pay the full cost for all the government benefits that it receives. So politicians have an incentive to promise more than they can deliver, borrow money to pay for it, and ignore the looming debt problem till they're safely out of office and its someone else's problem. In the USA this takes the form of a rash of municipal bankruptcies and severe budget shortfalls in states like Illinois and California. Many of these states are just another economic recession away from going through what Greece is going through. States in the USA are very much like nations in the Euro zone, they can't print their own currency, so are reliant on tax revenue to pay their bills. So when the debt is too large to continue to finance, new taxes and budget cuts become inevitable. My point here is that unsupportable debt burdens brought on by profligate governments are not unique to Greece. Instead of laughing, we should be seriously evaluating the budgets of our state and local governments and balancing them now before debt becomes a crisis here at home. Otherwise, our bankruptcy courts have a busy future ahead of them.

Urban Decay and Revolution

In the past year, the USA has seen racial unrest in both Ferguson and Baltimore relating to police killing of unarmed minority suspects. In Ferguson, the federal investigation into the police force found rampant abuses by the police directed primarily against the minority members of the city. The investigation in Baltimore is still on-going, whether it finds similar abuses or not will likely have a strong impact on whether the city sees further rioting. The tragedy in both cases is two fold. First, that the police feel free to use excessive force against suspects with impunity is a travesty. Police should have the highest levels of professionalism; these actions, even if taken only by a small minority of officers, tarnish the reputation of the police, the government and the rule of law. The second tragedy is that both of these incidents resulted in rioting and lawlessness instead of well organized non-violent protests. By resorting to lawless behavior, rioters stole the meaning from the deaths and ruined a good opportunity for a national debate over the proper role of police in our communities and the use of force by authorities against the citizenry.

One of the things that makes (or made, depending on your perspective) the USA great is its citizens' belief in freedom and liberty from the deprivations of government authority. Near the founding of our country, the concerns over the power of the federal government were so great that the states refused to ratify the constitution until it contained protections for individual citizens against the power of government. As a result, we now have the Bill of Rights. Before this, and before the confederacy that came before it, we as a nation fought a war against our then sovereign in the name of freedom. Go back even further into the annals of history and we can see the foundation for all constitutional governments, magna carta, was similarly concerned with protecting the rights of individuals against the actions of their king. The protection of individual liberty and freedom is the basis of all modern democratic societies. And yet still, in the modern age, we see the police acting like street thugs, beating and killing unarmed citizens, actions that in previous generations led to revolution. The results of these actions have already risen to the level of general rioting and lawlessness. When the state and its emissaries act without respect for the law and the rights of citizens, the citizens stop respecting their rule and the authority of their laws. This is the path towards violent revolution. If the state is to maintain some semblance of legitimacy, it should stomp out such abuses. I wish the members of the federal probes into both Ferguson and Baltimore luck reestablishing legitimacy.


Unfortunately, despite how important reestablishing the legitimacy of government and the respect of the rule of law is for a nation, the focus of these federal probes seems to be in establishing blame. While it is important to bring the perpetrators of the horrible abuses by police to justice, it is equally important to correct the institutional corruption that led to the abuses of power in the first place. In focusing too hard on individual bad actors, we are missing the true corruption at the heart of the system. I worry what it means for the nation if, after a few bad actors are made examples of and the feds oversee the local police forces for a few years, nothing changes. Likely we will still have arbitrary laws that will be equally arbitrarily enforced, we will still have police and government agents getting away with horrible abuses, and we will still have a deep and simmering anger among the citizenry over how the government uses its powers to oppress people.

We live in a crony capitalist oligarchy where we are all reduced to serfdom. Historically these kinds of government actions don't end peacefully. If we continue down the path of internal policing with electronic stasi agents monitoring our behavior and communications, with the police violently oppressing the citizens, with the few being enriched at the expense of the masses through crony capitalism, then our glory days are truly over and we are headed for a fall. That said, if we resort to violence in retaliation, we encourage the bloodshed to continue. Instead, I urge the protestors to learn the lessons of Gandhi and Dr. Martin Luther King, that non-violent protests are the best way to bring a modern government to its knees without losing the moral high ground. Only by proactively ending the violence ourselves can we end the violence inherent in the system.